2013 AJC H1 Econs QnPaper

READ THESE INSTRUCTIONS FIRST Write your name, PDG and index number in the spaces provided on all the work you hand in. Write in dark blue or black ink on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Begin your answer to each question on a fresh sheet of writing paper. Section B Answer one question. Begin your answer to Section B on a fresh sheet of writing paper. At the end of the examination, fasten your answers to each question separately. Fasten this cover page in front of your answers to Question 1. Indicate in the table below the question number of the question in Section B you have attempted. The number of marks is given in brackets [ ] at the end of each question or part question. Name _______________________________ ( ) PDG ______/12 This document consists of 8 printed pages and 1 blank page, including this cover page. [Turn over Section A Marks Awarded 1 / 30 2 / 30 Section B 3 / 4* * Delete accordingly / 25 Total Marks / 85 ANDERSON JUNIOR COLLEGE JC2 PRELIMINARY EXAMINATION 2013 Higher 1 8819/01 ECONOMICS Paper 1 16 September 2013 3 hours Additional Materials: Answer paper

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3 Section A Answer all questions in this section. Question 1 Fuel prices and the need for renewable energy Extract 1: Indonesia cuts fuel subsidies, risking social unrest President Susilo Bambang Yudhoyono is cutting fuel subsidies that threatened to swell to $30 billion in 2013 and pushed the budget deficit well beyond the legal limit of 3% of its Gross Domestic Product. In doing so, he risks sparking street protests and inflation. He has to weigh the threat of social unrest against the risk that international investors will desert the country. Meanwhile, the combination of a mounting budget deficit and a weakening currency - the rupiah has lost 5% of its value in the past 12 months, making it the second worst-performing currency in Asia - has sapped investor confidence. Adapted from Business Week, 27 June 2013 Table 1: Fuel information for Indonesia, 2009 to 2012 2009 2010 2011 2012 Oil Production (thousand barrels daily) 994 1003 952 918 Oil Consumption (thousand barrels daily) 1,316 1,426 1,549 1,565 Current account (US$ million) 10,628 5,144 1,685 -24,183 Current account (% of GDP) 2 0.7 0.2 -2.8 Sources: World Bank; BP.com Extract 2: Indonesia inflation hits 5.9% after fuel hike Indonesia's inflation accelerated in June after the government hiked the price of fuel for the first time since 2008. The increase had been expected after the price of fuel rose by up to 44% last month, pushing up the cost of transporting goods and people. The decision to reduce huge fuel subsidies, seen as a drag on Southeast Asia's largest economy, has sparked angry protests across the country. Econom ists have warned that inflation will likely accelerate to above 7% in the coming months. The delay in adjusting the price of subsidised fuel will [Turn over

4 have an immense effect on the economy. Indonesia has posted a current account deficit for three consecutive quarters this year, primarily becau se of rising import spending on capital goods and oil. Besides aggravating the country’s external stability, fuel subsidies were bad for the economy as they would only boost energy consumption. Mor eover, it would also widen inequality among Indonesians as the policy was not in effect pro-poor since the fuel subsidies were mostly enjoyed by the upper-middle class. Adapted from Channel News Asia, 1 July 2013 and Jakarta Post, 13 July 2013 Extract 3: More subsidies offered to ease fuel price hikes in China Despite moves by the central authorities here in China to provide more subsidies to fuel-dependent industries, the rise in prices at the pumps this year has many complaining about the impact it is having on their day-to-day lives. Public transport is one of the industries that is worst hit by the price increase. Oil price hikes will also lead to rising expenditure in energy consumption and soaring cost of farming resources and raw materials for agricultural industries. Subsidies will better protect the rights and interests of farmers. However, the artificially low energy prices increase waste and destroy incentives to invest in alternative technologies. Studies suggest that energy efficient measures can lead to more cost savings. Although renewable energy currently costs more, it may prove viable in the medium term with technological advances. Adapted from Global Times (China), 29 March 2012 Extract 4: Indonesia told to focus on renewable energy Indonesia has plentiful supply of accessible energy sources, both from fossil fuels and renewables, and is the largest energy producer and consumer in Southeast Asia. Yet the country is struggling to keep up with its own energy demands . Total energy demand is growing by around 7% per year, as the transport and industrial sectors grow and as households become more affluent. The National Energy Council (DEN) has issued a series of reco mmendations to reorient the national energy policy to renewable energy by 2050, urging the government to stop exporting gas and coal to preserve depleting fossil energy reserves. With the rise in fuel consumption and a decline in fossil energy reserves, renewable energy must be utilized and exports of gas and coal must be stopped as they could be used as alternatives to oil at home. To ac hieve the target, the country has to scrap its fuel subsidy and adjust the price to the global market to curb fuel consumption and to disburse more incentives to develop renewable energy. Adapted from Jakarta Post, 13 July 2013

5 Questions (a) (i) Using Table 1, compare Indonesia’s production and consumption of oil between 2009 and 2012. [2] (ii) Explain whether the above explains the changes in Indonesia’s current account balance in Table 1. [4] (b) Using demand and supply diagram(s), (i) explain the impact of an introduction of a fuel subsidy on the Indonesian government. [2] (ii) discuss whether consumers or domestic producers of fuel in Indonesia are more likely to benefit from the introduction of a fuel subsidy. [8] (c) Explain how cutting fuel subsidies can improve the allocation of resources. [6] (d) Comment on the impact of cutting fuel subsidies on the Indonesian economy. [8] [Total: 30 marks] [Turn over

6 Question 2 Growth and crisis Figure 1: China’s shares of private consumption and investment in GDP (%) Source: Economist Intelligence Unit, 2010 Table 2: Selected macroeconomic indicators, 2008 to 2012 China 2008 2009 2010 2011 2012 Unemployment rate (% of total labour force) 4.0 4.3 4.1 4.1 4.1 Inflation Rates (% change) 5.9 -0.7 3.3 5.4 2.7 Current account balance (% of GDP) 9.3 4.9 4.0 1.9 2.3 United States Unemployment rate (% of total labour force) 5.8 9.3 9.6 8.9 8.0 Inflation Rates (% change) 3.8 -0.4 1.6 3.2 2.1 Current account balance (% of GDP) -4.8 -2.7 -3.1 -3.1 -3.0 Singapore Unemployment rate (% of total labour force) 3.2 4.3 3.1 2.9 2.8 Inflation Rates (% change) 6.5 0.6 2.8 5.3 4.5 Current account balance (% of GDP) 16.1 17.2 28.6 26.7 18.7 Source: The World Bank, 2013 Table 3: Overview of world output measured in real GDP growth (%), 2008 to 2014 2008 2009 2010 2011 2012 2013* 2014* World Output 3.0 -0.6 5.0 3.9 3.1 3.1 3.8 Advanced Economies 0.5 -3.4 3.0 1.7 1.2 1.2 2.1 United States 0.4 -2.6 2.8 1.8 2.2 1.7 2.7 Euro Area 0.6